G-20 Leaders Tighten Grip on Banks

Basically, the G-20 Summit was a nice photo opportunity. The only real item to come out of this summit is that they are going to require banks to tighten lending standards. Of course, it’s a little late in the game for this. The following comments say it all.

“The question now is whether, in their haste to address a future crisis, the leaders of the Group of 20 may have inadvertently taken steps that could worsen the current one.”

"The last thing you want to do in a global credit crunch is go around and basically tell people to tighten, tighten, tighten."

As you now know, ever-increasing debt is required in our current economic system – when debt decreases (either because it is paid-off or the system reduces taking on more debt) – our money supply decreases – causing further pain in the system. Banks around the world are already ‘clamping down’ on lending to individuals and small companies due to increasing loan default rates. Loan defaults are skyrocketing for everything – homes, cars, credit cards, etc. Again, this shouldn’t surprise anyone – since banks must maintain capital levels - it’s only logical for them to tighten lending standards. You don’t want to use what capital you do have – on risky loans.
So, for the G-20 leaders to issue statements that governments are going to require tighter lending standards – doesn’t really make much sense at this point in the crisis. It would have made much more sense for Central Banks and governments to do something like this back in 2002-2005 – when lending was out of control. Now – it will only cause more pain in the world’s financial system.

If you study the numbers – you’ll notice that the total dollar amount of bank lending has actually increased – but not in the way you would expect. The increase in lending is due to large corporations tapping existing credit lines – because all other sources of funding are disappearing (short term debt markets). The number of new loans to individuals and small businesses is plummeting.

The question everyone should be asking is – why is so much debt required for the world’s financial system to function – short term, long term, corporate, personal, etc.? We’re starting to realize just how unstable this system really is.

The next questions are – do you really believe that the world’s leaders are unaware of the cause of all of this? Why are they only treating the symptoms and not the disease?

Of course they are aware of what is really happening – the truth is that they are lying to us – about a great many things.

jg – Nov 17, 2008
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NOVEMBER 17, 2008
G-20 Leaders Tighten Grip on Banks
After Weekend Summit, Economists Say Emphasis on Lending Restrictions Threatens a Quick Recovery

WASHINGTON -- In a weekend summit, leaders from the world's biggest economic powers ordered a clampdown on reckless market behavior, including steps they said would help prevent the next credit crisis.

President Bush says summit leaders have agreed to a number of terms to coordinate and modernize their financial systems in the hopes of keeping the global economic crisis from getting worse.

The question now is whether, in their haste to address a future crisis, the leaders of the Group of 20 may have inadvertently taken steps that could worsen the current one. "This is a big signal to everybody to clamp down on their banks to tighten lending standards," said Simon Johnson, a former chief economist at the International Monetary Fund. "The last thing you want to do in a global credit crunch is go around and basically tell people to tighten, tighten, tighten."

As part of a lengthy to-do list, G-20 leaders told financial regulators to demand that banks create bigger liquidity cushions, assess their risk-management practices and boost capital requirements for certain risky investing practices. The group set a March 31 deadline for the measures, while putting off major regulatory decisions.

Mr. Johnson, now a business professor at the Massachusetts Institute of Technology, said such moves would encourage banks to hoard capital and would make sense once the crisis has passed. But leaders, he noted, were eager to take action.

President George W. Bush, U.K. Prime Minister Gordon Brown, Chinese President Hu Jintao, French President Nicolas Sarkozy and the other G-20 leaders vowed to take the necessary steps -- government spending programs, tax cuts or interest-rate reductions -- to restart a global economy teetering on the edge of recession.

The leaders embraced a renewed effort to unblock global trade talks and promised they will refrain from using commercial barriers to protect their own industries. "We agreed on the importance of rejecting protectionism," Mr. Brown said. "It is the first time that a meeting of world leaders has instructed ministers to come to an agreement and I think we will see an agreement in the next few weeks."

The initiative could provide an early test for President-elect Barack Obama, who has campaigned as a trade skeptic, but may be reluctant to reject a major round of international trade talks as one of his first moves in the international stage.

The meeting also underscored a split Mr. Obama will have to reconcile. The U.S., China and Canada, among others, have been more cautious about new cross-border regulations than their European counterparts, especially the French.

Mr. Obama didn't attend the G-20 summit. He sent former Iowa Rep. Jim Leach, a Republican, and former Secretary of State Madeleine Albright to meet with G-20 representatives.
Much of the communiqué, released on Saturday, focused on steps to prevent a recurrence of the world-wide crisis that sprang from the collapse of trillions of dollars in securities backed by high-risk U.S. subprime mortgages. Most of Europe is now in recession, while the U.S. economy shrank at an annualized 0.3% in the third quarter.

World leaders pose for a group photo at the opening of the G-20 summit hosted by President George W. Bush.

"I'm a free-market person until you're told that if you don't take decisive measures then it's conceivable that our country could go into a depression greater than the Great Depression," Mr. Bush told reporters after the summit ended. The G-20 leaders endorsed a series of principles for action, such as promoting financial-market transparency. They also assigned finance ministers a number of immediate steps before their next summit in April, such as establishing "colleges" that bring together supervisors from different countries to swap notes on the institutions they oversee.

The communiqué itself reflected the underlying tension between reducing risk and increasing lending. "Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries," the leaders said.

Some London bankers are already up in arms over a European Union proposal, similar in outline to that of the G-20, that would force banks to hold on to extra cash to cover certain losses. Banks say that will make raising cash more expensive and discourage lending. U.S. officials share the concern that too much regulation might worsen the credit shortage, White House spokesman Tony Fratto said on Sunday. But, Mr. Fratto said, "given the current psychology in the financial sector, better supervision and transparency could instead have the effect of reducing fears about counterparty risk and so increase the appetite for risk-taking."

—John W. Miller in Brussels and Sudeep Reddy in Washington contributed to this article.
Write to Michael M. Phillips at michael.phillips@wsj.com, Alistair MacDonald at alistair.macdonald@wsj.com and Kara Scannell at kara.scannell@wsj.com